CREDIT ANALYSIS REPORT

UEM EDGENTA BERHAD - 2021

Report ID 60538900458 Popularity 65 views 9 downloads 
Report Date Dec 2021 Product  
Company / Issuer UEM Edgenta Bhd Sector Trading/Services - Conglomerates
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its ratings of MARC-1IS /AA-IS on UEM Edgenta Berhad’s Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) under the Sukuk Murabahah Programme of up to RM1.0 billion. The ratings outlook is stable. The outstanding sukuk stood at RM250.0 million as at end-November 2021.

Rationale     
The affirmed ratings are driven by UEM Edgenta’s established operating track record in healthcare and infrastructure services gained through long-term contracts in healthcare support services (HSS) and highway maintenance works. Its strong credit profile is underpinned by healthy liquidity and a low leverage position. Moderating factors to the ratings are pressures on margins in its business due to increased operating cost, and potential further deferment of work orders under its infrastructure business due to the spending curtailment by some of its customers. 

The group’s HSS business was affected by higher operating cost associated with requirements by hospitals to stringent precautionary measures amid the pandemic in 2020-2021. The margin compression and escalating pandemic-induced costs in the Malaysia concession business has resulted in pre-tax loss of RM5.2 million for subsidiary Edgenta Mediserve Sdn Bhd, which serves 32 government hospitals in Peninsular Malaysia. However, this loss was offset by its overseas HSS business, mainly in Singapore and Taiwan, undertaken by subsidiary UEMS Pte Ltd, which recorded profit of SGD31.2 million in 2020. We understand that the pandemic-induced cost increases for UEMS have been mitigated by certain pandemic opportunities in Singapore and Taiwan, where the group has also secured new contracts amounting to RM314 million during 1H2021. Overall revenue from the healthcare services operations grew 14.1% y-o-y to RM645.0 million in 1H2021. Pre-tax profit was 34.3% higher y-o-y at RM37.1 million. 

The group’s infrastructure services business, undertaken by Edgenta PROPEL Berhad, has also been impacted during 2020-1H2021. This was mainly due to lower civil and pavement works executed for annual work plan and traffic management for the expressways during the movement restriction periods. Edgenta PROPEL undertakes long-term highway maintenance services for a portfolio of highways including North-South Expressway and Lebuhraya Pantai Timur 2 of its related company Projek Lebuhraya Usahasama Berhad (PLUS). It also jointly operates the 116-km Cikampek Palimanan Highway in Indonesia. For 1H2021, its infrastructure services business registered a 6.5% y-o-y decline in revenue to RM250.8 million and a decrease in pre-tax profit by 46.1% to RM17.7 million.

For 1H2021, consolidated revenue improved to RM1.0 billion while pre-tax profit remained modest at RM29.6 million despite improving from the previous year’s corresponding period. Its consolidated borrowings remained stable at about RM464.6 million at end-June 2021, translating to a gross debt-to-equity (DE) ratio of 0.30x. The group has a strong liquidity position and remains in a net cash position. Going forward, it has work-in-hand worth a combined RM11.6 billion as at end-June 2021 that would support earnings visibility in the medium term. The bulk of its contracts are related to infrastructure services (RM7.3 billion) and healthcare support (RM3.4 billion). 

Rating outlook     
The stable outlook reflects our expectation that UEM Edgenta’s credit metrics will remain broadly in line with the current levels in the near term.

Rating trajectory

Upside scenario     
Any upgrade in the ratings in the near term would be guided by a reversion to the group’s pre-pandemic operating margins and maintaining a healthy balance sheet. 

Downside scenario     
The ratings and/or outlook could come under pressure if the group’s financial performance takes longer-than-expected to recover and/or if borrowings were to rise sharply due to acquisitions that are not earnings accretive in the near term. 

Key strengths
Longstanding operating track record in healthcare support services and highway maintenance 
Stable income from long-term contracts
Low leverage position and healthy liquidity position

Key risks
Margin compressions from the increase in pandemic-related costs 
Contract termination risk


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